Self-Regulatory Organizations; Financial Industry Regulatory Authority, Inc.; Notice of Filing of Amendment No. 2 and Order Granting Accelerated Approval of a Proposed Rule Change, as Modified by Amendment Nos. 1 and 2, To Adopt Supplementary Material .19 (Residential Supervisory Location) Under FINRA Rule 3110 (Supervision)

The U.S. Securities and Exchange Commission (SEC) has published in the Federal Register an order in relation to a „proposed“ rule amendment of the Financial Industry Regulatory Authority (FINRA) – as modified by amendment No. 1 and 2 – concerning the inspection of residential locations used for business purposes by associated persons of FINRA member firms. In this order, the SEC confirms that it has approved the final rule changes, but seeks comments on the changes, including amendment No. 2, as outlined in the order.
To recall, FINRA seeks (sought) to „adopt Supplementary Material .19 (Residential Supervisory Location) under FINRA Rule 3110 (Supervision)“ to add a new category entitled Residential Supervisory Location (RSL) for purposes of the rule (please see EventID 20492 in this context for more information). Thereafter, the private residence of associated persons engaged in specified supervisory activities would be treated as a non-branch location provided that certain conditions are met. Treatment as a non-branch location indicates that the residential location would be exempt from the yearly inspection requirements as mandated by the rule. Nonetheless, such locations would still be subject to periodic inspections of at least every three years.
The conditions that would have to be satisfied to qualify as an RSL include, but are not limited to the following:
– customer funds and assets are not handled at such location;
– the associated person refrains from meeting with customers at the location;
– all firm-related communication must be made via the firm’s own communication system; or
– books and other documents of the firm are not kept at this location.
Certain locations would be excluded from qualifying as „Residential Supervisory Locations“, for example, if the associated person is inexperienced (less than one year of work experience in supervisory functions), an investigation is underway towards the person; and / or if the person is subject to a „mandatory heightened supervisory plan“.
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Based on the feedback received by respondents, FINRA modified the proposed Supplementary Material .19 under FINRA Rule 3110 twice, with the latest amendment (amendment No. 2) only making changes to the wording relating to the mandatory risk assessment requirement under proposed Rule 3110.19(e) which necessitates firms to conduct and document a person-specific risk assessment before designating an office or location as an RSL. This assessment should encompasses various factors, including – among others – an evaluation of customer complaints, considering both the volume and nature of such complaints, or an assessment of compliance with a firm’s written supervisory procedures.
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The SEC now finds that these changes – together with the original proposal – align with FINRA’s intention and its statutory mandate and are in line with provisions under the Exchange Act, which require, among other things, that „FINRA rules be designed to prevent fraudulent and manipulative acts and practices, promote just and equitable principles of trade, and, in general, protect investors and the public interest“. Therefore, the SEC has approved the changes.